Japan's public borrowings will climb 10 percent in the year starting April to a record 1,086 trillion yen as the government pays for rebuilding after the quake, the finance ministry said last month. Prime Minister Yoshihiko Noda plans to double the nation's sales tax to 10 percent by the middle of the decade, an increase his government said won't be enough to balance the budget by 2020.

Standard & Poor's has had Japan's debt rating on a negative outlook since April after lowering it to AA- in January 2011. It said in November that Noda's administration hasn't made progress in tackling the public debt burden.

“It's hard to tell when the market may cause a fiscal collapse -- it could be three years from now, or five years, or ten years, or tomorrow,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo. “It's like trying to predict an earthquake, though the magnitude may be bigger the further in the future it strikes.”

Eoin Treacy's view At some point, Japan's liabilities are going to get to a point where its ability to repay is seriously questioned. 10-year JGB yields remain in a relatively consistent 5-year downtrend and while they have stabilised near 1% over the last year, a sustained move above 1.2% would be required to begin to suggest a return to medium-term supply dominance. A break of this downtrend would suggest more widespread questioning of Japan's credit worthiness.

While the medium-term risk to JGBs and the Yen is non trivial, the Euro and US Dollar still monopolise investor's short-term concerns. The Trade Weighted Yen Index (46.49% Dollar and 39.27% Euro weighted) has appreciated by two thirds since mid-2007. It has paused near 150 since September in a relatively steady reversion towards the 200-day MA, but a sustained move below 140 would be required to begin to question the consistency of the medium-term uptrend. The BoJ has been defending the ¥76 area against the US Dollar since March 2011, intervening on at least three occasions. A move above ¥78, held for more than a week or two, would be required to confirm more than temporary Yen weakness. The Euro has rebounded from a short-term oversold condition against the Yen to challenge its almost yearlong downtrend. A sustained move below ¥100 would be needed to check current scope for some additional upside.

Previously out of favour markets have attracted investor interest following the ECB's injection of liquidity. This might simply be because investors are looking at what is comparatively cheap following a three-year uptrend on Wall Street and many Asian markets. Middle Eastern and Eastern European stock market indices have outperformed over the last month, not least because they are rising from a low base. The Topix has also rallied but so far lagged other Asian markets. Perhaps more notable has been the leadership of the Japanese banking sector. This graphic of Topix sectors ranked by performance year to date, highlights Securities & Commodity Futures Trading, Insurance, Real Estate and Banks in the top-10 best performers since January 1 st .

The Topix Banks Index trended lower versus the wider market between late 2005 and lost momentum from late 2010. It displays a saucering characteristic over the last couple of years and a break of the 8-month progression of higher reaction lows, currently near 0.14 would be required to question medium-term scope for continued outperformance. In absolute terms, the sector continues to extend its rally from the psychological 100 area, and while somewhat overbought in the very short-term a clear downward dynamic would be required to check momentum. The sector's competitive 3.5% yield should offer support on the next pullback.

I used the Chart Library's High/Low Filter to scan the constituents of the Topix for shares making at least new 12-month highs in the last 5 days. Here is the list of 93 companies ranked by subsector. For detailed instructions on how to use the Chart Library filter system, click here.

Isuzu Motors (1.45%) has consistently appeared in reviews of Japan's better performing shares. (Also see Comment of the Day on January 5th 2011). It broke out of a yearlong range this week and a sustained move below ¥350 would be required to question medium-term potential for additional upside. Elsewhere in the heavy duty vehicles sector Hino Motors broke out of an 18-month range last week. Kyokuto Kaihatsu broke out of its base in December and has accelerated higher. It announced a surprise dividend increase this week and advanced even further. The first clear downward dynamic is likely to mark the onset of a reversionary process. In the Auto Equipment sector, Unipres Corp is overbought in the short-term, encountered resistance near the psychological ¥2500 this week and looks likely to revert back towards the mean. A sustained move above this week's highs would be required to reassert the medium-term uptrend. In the Auto Parts sector, Autobacs Seven has held a progression of higher reaction lows since late 2008 and hit a new closing 3-year high this week, completing the base.

In the Distribution/Wholesale sector Emori & Co is breaking out of a yearlong range. Spk Corp (3.84%) is completing a four-year base. Yamazen completed its base last year but has been ranging since August. It is now challenging the recovery high and a sustained move below ¥550 would be needed to check potential for additional upside. Maruka Machinery appears to be in the process of completing a three-year base.

In the consumer & cosmetics sector, Pan-Asian Dividend Aristocrat Uni-Charm (0.72%) has been a notable relative and absolute outperformer. (Also see Comment of the Day on August 23rd 2011) Its advance has picked up pace of late and it is becoming increasingly overextended relative to the MA. However, a clear downward dynamic will be required to check momentum and suggest the onset of a reversionary process. Japan Tobacco is another dividend aristocrat (1.86%) and hit a new recovery high this week.

In conclusion, while Japan faces a number of challenges, there is reason for cautious optimism. The outperformance of the banking sector is important and is a characteristic shared by a number of other countries at present. For a market that has been a serial underperformer, it is generally sound advice to back the early leaders because they are outperforming for a reason. They also tend to exhibit well defined consistent uptrends which are easier to monitor and are favourable risk-adjusted ways of accessing the market.